Snapchat Stock Risks Getting “MySpaced”

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Sharply criticized in 2018, one of the most remarkable comeback efforts in 2019 belongs to Snap (NYSE:SNAP). A social media firm that focuses on the youth demographic, its Snapchat app has taken a backseat to sector powerhouse Facebook (NASDAQ:FB) and to a lesser extent, Twitter (NYSE:TWTR). However, a blistering 190% year-to-date performance from Snapchat stock made the company relevant again.

Source: Puckpao / Shutterstock.com

Now, the question becomes how will the SNAP stock price fare in 2020 and beyond? If the social media firm’s latest earnings report for the third quarter is any indication, investors should stay the course. As a quick recap, SNAP impressed Wall Street by paring an expected per-share profitability loss of 5 cents with a 4-cent loss. Additionally, management surprised on revenue, generating $446 million against the consensus target calling for $435.1 million.

The latter metric was particularly important for Snapchat stock to establish credibility. As I mentioned at the top, SNAP caters to a younger audience. Back two years ago, the underlying app most attracted the 18 to 24 years old demographic. The demo allocation fell precipitously as the user ages.

On one hand, this is a positive for the SNAP stock price. After all, marketing experts spend millions of hours combined to decipher youth consumerism. But on the other hand, younger end-users have a liability: they often don’t have the spending power of older demos. Thus, even if you converted them through sponsored advertisements, it won’t mean much relative to Facebook or Twitter conversions.

This demographic bias also limits the viability for how SNAP can attract those advertisers. But a related problem for Snapchat stock that doesn’t get much airtime is this: the company lacks regional diversity.

Snapchat Stock Is Regionally Identical to MySpace

Initially, the lack of non-U.S. user engagement may not seem like a problem. After all, we dictate the direction of entertainment and pop culture. For example, aspiring film actors know only one destination: Hollywood, and I’m not talking about the one in Florida.

However, the world is a big place, yet the internet has allowed us unprecedented access to it. To win in social media requires more than just local support. That’s one of the reasons why Facebook investors never lose sleep about Yandex’s (NASDAQ:YNDX) social media platform Aura: earth is more than just Russia, despite what their state-sponsored propaganda states.

Most worryingly for SNAP stock, its global usage statistics are very similar to MySpace, the surviving but irrelevant platform. Back in its heyday, the majority of MySpace users hailed from the U.S., or nearly 47% of total users. The next largest region was Puerto Rico at 6.6%, followed by the U.K. at 4.1%.

Snapchat users by country
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Source: Chart by Josh Enomoto

Similarly, most of Snapchat’s (daily active) users are from the U.S., a whopping 46.5%. Then comes France at 9.7% and India at 9%. With this lack of diversity, it’s hard to believe in its growth narrative. Clearly, the rest of the world doesn’t view the platform as useful or attractive. Logically, this is a huge dilemma for Snapchat stock.

Moreover, no other major U.S-based social media company features such slanted regional bias. For example, Twitter has over 48 million American users, which accounts for less than 15% of total users. Japan, with nearly 36 million users, makes up nearly 11% of the total pie.

And Facebook is far more diverse. For one thing, the U.S. isn’t the biggest active user market. That title belongs to India, with 269 million users. Even then, India only captures 11% of Facebook’s global user base.

SNAP Stock Needs a Reset

Another factor that has me concerned about Snapchat stock over the long run is where it differs from MySpace. Back when the latter platform was popular, it cut across a wider age demo in the U.S. During its peak, around 40% of MySpace users were from households making more than $75,000.

Admittedly, the way this statistic is worded may include teen users with wealthy parents. However, MySpace was popular because it attracted a broad range of entertainers and professionals. Undoubtedly, then, many of these users commanded serious spending power.

Plus, the demographic trend for SNAP stock demonstrates that as users age, they end up on Facebook. Therefore, management needs to reset their growth strategy. Otherwise, it may end up having the same fate as MySpace.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/snapchat-stock-risks-getting-myspaced/.

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